Briefly: In our opinion, no speculative positions in gold, silver and mining stocks are justified from the risk/reward perspective. In other words, we think that closing the existing short positions and taking profits off the table is a good idea right now.
As far as the medium-term trend is concerned, nothing changed based on what happened on Friday and what’s happening today, but the chance of a short-term rebound increased and this – in light of the upcoming FOMC meeting – suggests that short positions are now too risky.
Let’s take a look at the charts (charts courtesy of http://stockcharts.com).
The USD Index rallied substantially on Friday, which is generally a bearish development for the precious metals sector, but it doesn’t seem to be the case this time. Why? Because the rally in the USD was huge and the decline in gold, silver and miners was small. That’s a big warning sign, suggesting that precious metals may not be ready to decline without an additional (probably small, but still) upswing beforehand.
The signal is being repeated today – the USD declined by only 0.20 or so and gold managed to rally to $1,319.50, more or less erasing Friday’s decline. Gold’s strong performance relative to the USD Index is quite an important bullish sign.
From the long-term perspective, nothing really changed – the outlook remains bearish and the sell signal from the Stochastic indicator remains in place.
On the short-term chart, we can see that gold broke below the rising red support line and closed below it on a weekly basis. That’s a bearish sign for the following weeks. Still, let’s keep in mind that the breakdown is not yet verified and with the move to $1,319.50, gold was very close to invalidating the breakdown.
Invalidations of breakdowns are strong bullish signs and if we see one, it would likely be followed by a quick rally. The problem with this week is that we can see all sorts of odd market behavior related to the FOMC meeting. Consequently, it could easily be the case that the breakdown is invalidated, followed by a sharp rally and only then would a sustained decline continue.
In the case of silver and miners, the relative strength vs. the USD Index is even more visible. The white metal declined on Friday by $0.18, but rallied over $0.30 today. Miners have not had a chance to move yet today, but they declined very modestly on Friday. The miners’ relatively strong performance vs. gold (which declined more visibly on Friday) is also a bullish sign for the very short term.
Summing up, the outlook remains bearish for the coming weeks, but in light of the bullish signs that we’re seeing (PMs’ strong performance vs. the USD Index and miners’ strong performance vs. gold) and the looming FOMC meeting, it seems that taking profits off the table and closing the current short position is justified from the risk to reward point of view. It seems that another trading opportunity is just around the corner and - as always – we will keep you – our subscribers – updated.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): No positions
Long-term capital (core part of the portfolio; our opinion): No positions
Insurance capital (core part of the portfolio; our opinion): Full position
Plus, you might want to read why our stop-loss orders are usually relatively far from the current price.
Please note that a full position doesn’t mean using all of the capital for a given trade. You will find details on our thoughts on gold portfolio structuring in the Key Insights section on our website.
As a reminder – “initial target price” means exactly that – an “initial” one, it’s not a price level at which we suggest closing positions. If this becomes the case (like it did in the previous trade) we will refer to these levels as levels of exit orders (exactly as we’ve done previously). Stop-loss levels, however, are naturally not “initial”, but something that, in our opinion, might be entered as an order.
Since it is impossible to synchronize target prices and stop-loss levels for all the ETFs and ETNs with the main markets that we provide these levels for (gold, silver and mining stocks – the GDX ETF), the stop-loss levels and target prices for other ETNs and ETF (among other: UGLD, DGLD, USLV, DSLV, NUGT, DUST, JNUG, JDST) are provided as supplementary, and not as “final”. This means that if a stop-loss or a target level is reached for any of the “additional instruments” (DGLD for instance), but not for the “main instrument” (gold in this case), we will view positions in both gold and DGLD as still open and the stop-loss for DGLD would have to be moved lower. On the other hand, if gold moves to a stop-loss level but DGLD doesn’t, then we will view both positions (in gold and DGLD) as closed. In other words, since it’s not possible to be 100% certain that each related instrument moves to a given level when the underlying instrument does, we can’t provide levels that would be binding. The levels that we do provide are our best estimate of the levels that will correspond to the levels in the underlying assets, but it will be the underlying assets that one will need to focus on regarding the signs pointing to closing a given position or keeping it open. We might adjust the levels in the “additional instruments” without adjusting the levels in the “main instruments”, which will simply mean that we have improved our estimation of these levels, not that we changed our outlook on the markets. We are already working on a tool that would update these levels on a daily basis for the most popular ETFs, ETNs and individual mining stocks.
Our preferred ways to invest in and to trade gold along with the reasoning can be found in the how to buy gold section. Additionally, our preferred ETFs and ETNs can be found in our Gold & Silver ETF Ranking.
As always, we'll keep you - our subscribers - updated should our views on the market change. We will continue to send out Gold & Silver Trading Alerts on each trading day and we will send additional Alerts whenever appropriate.
The trading position presented above is the netted version of positions based on subjective signals (opinion) from your Editor, and the Tools and Indicators.
As a reminder, Gold & Silver Trading Alerts are posted before or on each trading day (we usually post them before the opening bell, but we don't promise doing that each day). If there's anything urgent, we will send you an additional small alert before posting the main one.
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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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